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One Year Outlook for Currencies

Nicole Elliott from Mizuho Corporate Bank at 10/12/09


EUR should spend Q1 2009 getting used to current levels and consolidating between 1.2500 and 1.5000

Comment: We underestimated the need for US dollars when de-leveraging; we now feel that investors are now more carefully assessing currency needs and preferences. Having already reversed a lot of last year’s losses, admittedly in very thin conditions, we feel the Euro should spend Q1 2009 getting used to current levels and consolidating between 1.2500 and 1.5000. Late in Q2 we expect the Euro to strengthen some more, to 1.5500 and hopefully by then one-month at-the-money implied volatility will subside towards 13.00%. The real question for us is when, and at what speed, will the ultra-long term trend to generalised US dollar weakness resume. We expect the Euro to match its all-time high of 1.6040 by year-end, at the very least.

A weekly close below 1.5500 would force us to review long term outlook.

Read the One Year Outlook for EUR

EURGBP: The year−end high at 0.9805

Comment: So far this week we have undone the huge rally in the last two weeks of December, with the year-end high at 0.9805 an ‘evening star’ candle and forming an important top. During this quarter we favour a lot of consolidation between 0.8800 and 0.9600, though a collapse back down to December’s opening level at 0.8250 cannot be completely ruled out. Q2 should be dominated by more very large and random price swings at a slightly lower level, say between 0.8200 and 0.9000. Only in Q3 will prices begin to stabilise and hold in narrower ranges, so that one-month at-the-money implied volatility falls from the current record level just under 20.00% to closer to 10.00%. By year-end a drop to 0.8000, maybe 0.7700, is possible.

A weekly close above 0.9600 would force us to review.

Read the One Year Outlook for EURGBP

GBP: should recover in the next six months

Comment: Having completely underestimated anti-sterling feeling in 2008, losing a personal fortune in the process, investors are unlikely to listen to our views this year. We feel the pound is oversold, here and against a raft of other currencies (a possible exception Scandinavia), and that it should recover a proportion of these over the next six months. In the second half of the year we expect generalised US dollar weakness to resume. Cable has spent the last two months painfully basing in a downward-sloping ‘wedge’ formation against the 1.4500 area. A sustained break above 1.6000 would complete an important interim base setting off a steady rally to 1.8000 by year-end.

A monthly close below 1.4000 would force us to review.

Read the One Year Outlook for GBP

GBPJPY: The biggest ever percentage quarterly fall

Comment: We are going to stick our neck out on this one and say ‘enough is enough’. Following its biggest ever percentage quarterly fall, and in Yen terms the biggest since 1982 when it started off at 450.00, prices are unlikely to extend beyond the all-time low at 128.20 of April 1995. However, rather than reversing the catastrophic losses, the cross should trade broadly sideways in a very wide band. Moves might be so large that to many these will feel like a series of alternating trends. An initial rally to 150.00, possibly as high as 160.00, is likely in the first half of the year. In the second half we favour many random swings roughly between 140.00 and 170.00.

A sustained break below 125.00 forces us to review.

Read the One Year Outlook for GBPJPY

JPY: Dollar/Yen moves in the second half of last year were a bit bigger than we had expected

Comment: Dollar/Yen moves in the second half of last year were a bit bigger than we had expected as the ‘carry trade’ (in its many guises) unwound amid the biggest global financial mess. This year should prove equally tough, so at least we cannot blame the element of surprise. During Q1 2009 USD/JPY should hold above the pivotal 85.00 area, with rallies probably capped at 96.00 initially although a push towards 100.00/102.00 some time early in Q2 cannot be completely ruled out. Before the end Of Q2 the very long term trend towards generalised US dollar selling should resume, though this time the Yen is unlikely to outperform other major currencies. We expect a drop below 85.00 in Q3, to 82.00 and a re-test of the all-time low at 79.70 of April 1995. The last quarter of 2009 should be dominated by correction and consolidation around 85.00.

A week close above 102.00 forces us to adjust and review.

Read the One Year Outlook for JPY

EURJPY: The collapse in H2 2008 was so fast

Comment: The collapse in H2 2008 was so fast because it had to make up for time wasted in the preceding twelve months. Having comfortably met our downside target we have come to a juddering halt so that the extension to 107.00 we had expected now looks less likely. Rather, over the next three months, maybe six, we favour a series of very messy and random price swings roughly between 120.00 and 135.00. The longer we hold above 115.00, the more likely a very slow short squeeze up towards 140.00 at the very end of the year. Note that we cannot completely rule out a final downside probe to 110.00/107.00 though a sustained drop below 105.00 is considered unlikely. Were this to be the case, expect a re-test of the all-time low at 89.00 of October 2000.

Weekly closes either above 135.00 or below 115.00 force us to adjust.

Read the One Year Outlook for EURJPY

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